Natuzzi SpA (NTZ) 2010 Q4 法說會逐字稿

Good day everyone and welcome to the Natuzzi Fourth Quarter 2010 Earnings Conference Call. This call is being recorded. For opening remarks and introduction, I would like to turn the call over to Silvia Di Rosa. Please go ahead, ma'am.

Good day and welcome to Natuzzi Conference Call. With us is -- in our call today are Vittorio Notarpietro, CFO, and Giuseppe Clemente, Chief Operations Officer, while Pasquale Natuzzi, Chairman and CEO, Cosimo Cavallo, Chief Editions Brand Officer, and Simon Hughes, the Chief Natuzzi and Italsofa Brand Officer are in [Ipoint] for the [Spring fair], and they will be connected by telephone. The CFO will receive -- will revise fourth quarter and full year 2010, and then we will open the call to your questions.

So, you should have received an email copy of Natuzzi Earning Results. If not, you can find information at the Natuzzi website, www.natuzzi.com. Before proceeding, please be advised that the discussion today could contain certain statement that constitutes forward looking statements under the United States Security Law. Obviously, actually result may differ materially from those in the forward-looking statement because of risks and uncertainties that can affect our result of operation and financial condition.

We have the risk and the uncertainties, which have in the past affected, might continue to affect our results of operation and financial condition in our report on form 20-F for the fiscal year ended in December 31st, 2009. This report is available on our website under www.natuzzi.com or from us upon request. You may also obtain a copy of our form 20-F actually from United States Securities & Exchange Commission. So now, I will pass the call to the CFO, Vittorio Notarpietro, that will go through all the figures of the four quarter and full year 2010.

Thank you Silvia, good morning to everyone. Thank you for joining us today to comment on Natuzzi 2010 Full Year and Fourth Quarter Results. Before analyzing 2010 full year results, let me highlight the most recent achievements. Recovery of sales in North America, a farther improvement on cost of goods sold from 64% in 2009 to 62% in 2010. Successful North American program, which means a reduction of lead times from Chinese plant to North American market, important overheads reduction, construction of the new and largest Natuzzi factory in Shanghai, EUR47 million in cash from Chinese authority to relocate one of the three existing plants, and finally the worldwide S&P rollout.

Considering 2010 full year results, it is extremely important to know that the year was affected by two important negative external events. The huge increase of shipping cost and the boost of raw material prices, however thanks to a significant work we did to improve operations efficiency, and to reduce overhead cost, we achieved a very important target, breakeven at the EBIT level.

So, full year 2010 consolidated profit and loss figures. Total net sales recorded at 0.6% increase versus the full year 2009, but most importantly Upholstery net sales were up 2.2% compared to 2009. Let me remind that in 2009, we registered a decline in upholstery sales of 23.3% versus 2008. In 2010, Natuzzi brand registered a minus 5.4%, which was concentrated in Europe.

In fact, Natuzzi sales went up in the Americas and in the rest of the world. All other brands, I mean Italsofa, Editions and unbranded, recorded a positive performance of plus 8.4% versus 2009, which is a quite good result after a slowdown starting years ago. From a geographical point of view, the rest of the world recorded the strongest performance of plus 23.8% versus 2009, in particular in China we had a strong growth, up 48% in the Natuzzi brand, and up 60% on all other brands.

This important improvement was due to the openings of Italsofa in Natuzzi stores. In Australia, plus 20.4% Natuzzi brand and plus 35% on all other brands, and in Korea minus 12.1% Natuzzi, but up 47.6% on all other brands. The percentage of the rest of the world on total Upholstery sales increased from 10.4% in 2009 to 12.6% in 2010.

In the Americas, we had a significant recovery of 17.5% versus 2009. In particular, we would highlight a double digit growth in Canada, plus 45.1% for Natuzzi brand and plus 45.2% on other brands. In USA, we registered a minus 16.2% for Natuzzi brand, and a plus 12.5% on all other brands. The percentage of the Americas on total upholstery sales increased from 31% to 35.7%.

On the contrary, in Europe, upholstery sales for the full year 2010 (technical difficulty) 2009 registered a slowdown of minus 11.4%. United Kingdom, among the most important countries in terms of sales was the only one recording a positive performance of plus 16% for Natuzzi brand and plus 10.3% for more other brands. As a consequence, the percentage of euro on total upholstery sales decreased from 47.2% to 40.5%. In Italy, the performance was minus 3.4% versus previous year.

Cost of goods sold improved from 64% to 62% in 2010. 2010 consumption was inline with 2009, 41.2% on net sales. In spite of the [huge] (technical difficulty) of prices and (technical difficulty) leather, 2010 transformation, which means labor and industrial costs registered a significant improvement accounting (technical difficulty) on net sales versus 22.8% here. [Higher] labor cost increase in Romania and China. We constantly work on our production plans in order to increase efficiency, rationalize processes and improve customer service.

In the Italian factory, we started a pilot process, so called moving line production, and we are shifting from manual carting to virtual nesting and automatic cutting both to recover productivity and increase efficiency. We created the so called the [Kaizen] promoter of this to spread and coordinate the efficiency process in the worldwide Natuzzi productive world. In China, we built the new factory of 88,000 square meter in Minhang Export Processing Zone in Shanghai, and the full capacity production will be completed by May 2011, so that the Chinese Natuzzi production will be grouped in only one factory within the end of May.

The Natuzzi Leather Processing company and our Foam Processing company improved in performance, thanks to a deep restructuring that involved different functions and processes. Selling expenses, our net sales went from 29% of 2009 to 29.8% in 2010, but this increase was due to a boost of shipping cost in China or from China to North America to be more precise. Advertising investment represented 5.4% of 2010 net sales versus 6.2% in 2009.

G&A expenses, as a percentage on net sales, improved to 8.2% versus 9% in the previous year that allowed a reduction of EUR4.1 million in absolute terms. Overall, the overhead costs excluding transportation, commissions and advertising, registered a reduction of EUR5.1 million. EBITDA, EBIT before interest taxes, the depreciation and amortization recorded a strong improvement passing from EUR16.2 million in 2009 to EUR23.8 million in 2010. As a result, operating income EBIT recorded a positive EUR0.4 million compared to a negative EBIT of EUR10.6 million in 2009. The net group loss was EUR11.1 million as compared to a loss of EUR17.7 million in the previous year.

Highlights of the profit and loss fourth quarter figures of 2010, total net sales were EUR132 million, down 13.3% as compared to fourth quarter 2009. Upholstery net sales were EUR115.8 million, down 13.5% compared to the same period of last year. From a geographical point of view, the rest of the world continues to record positive results, while the Americas' performance was very different from the 2010 previous quarters. The main reasons for this decline in US market in the fourth quarter 2010 came from the market. Retail, major customers were down in sales in the fourth quarter compared to 2009, this includes both US and Canada.

General business conditions for furniture retail started to decline in July leading to lower order rates in July and September, which means fourth quarter shipments. Promotion for Columbus Day closed 80 orders in July for an arrival in September. This was met by lower demand at the retail and caused a surplus of inventory, leading to fewer fourth quarter orders. Although the negative sales performance, the industrial margin in the fourth quarter of 2010, 38.9% on net sales, remained inline with the fourth quarter 2009, which was 39%, thanks to the above mentioned activities and efforts. As a result, EBITDA went from EUR8.1 million in the fourth quarter 2009 to EUR5.4 million in the fourth quarter 2010, and EBIT went from a positive EUR2.1 million in 2009 to a positive EUR0.2 million for the fourth quarter 2010.

Let's now comment on the balance sheet figures. Cash and cash equivalent decreased only by EUR5.2 million, going from EUR65.3 million at the end of 2009 to EUR61.1 million at the end of December 2010. Net cash generated by operating activities amounted to EUR1.6 million, resulting from a negative working capital of EUR9.9 million, plus a net group loss of EUR11.1 million offset by no monetary cost of EUR22.6 million.

Total cash used on investments was EUR17.7 million related mainly to S&P rollouts, a photovoltaic plant and the first Chinese factory relocation investments. Cash generated by financial activities was in the area of EUR10.9 million. Net financial position is still positive for EUR45.6 million, down by EUR13 million as compared to 2009, which was EUR58.6 million, mainly due to the investment on photovoltaic plants financed by new debt and sub-cash. Such investments on photovoltaic plant will allow the Company to reduce energy cost. At present, we have already received the 95% of the Chinese refunding, so that today net financial position of the group is in the region of EUR80 million, 80.

2011 outlook, in recent years we've built an extraordinary grand equity, developed products, opened stores worldwide, invested in advertising to tell the value of the brands. According with our Italian rules, we continue to leverage on our values and bid on innovation in strategic areas, product, processes, services. We have developed a portfolio brand that allow us to compete in all market segments with the three brands, Natuzzi, Italsofa and Editions addressed to different customers.

We are working to the full integration of the brands, markets, distribution channels and production [ops] to better serve each brand. In a still weak and [unsustaining] scenario, we continue to strengthen the Group organization at central and local level in order to improve our positioning in the furniture arena by increasing our market share, thanks to the [dedicated] and the professionalism of our worldwide staff.

The main drivers and or actions to grow with the Natuzzi brand are the following, getting traction on the furnishing business at retail, which is already between 20%, 25% of business in our key stores, reviewing the organization to have a separate unit to concentrate on this growing opportunity, project to define the fabric opportunity which [runs] at approximately 4% of sales, but (inaudible) opportunity of significant addition of sales, making partnerships primarily for development markets, increasing performance through total of sales and a more affordable concept, defining a core collection representing most of sales, reviewing a replenishment program.

As far as Edition is concerned, and unbranded, the main drivers in actions are the following. Dedicated sales force to cover the markets more effectively, dedicated management and staff at corporate level. The new display concept will generate more sales and quicker turnover, the rollout is particularly aggressive in North America this year. Positive response after the [Cologne] sale, several new models are about to be introduced at the [Ipan] market and Milan sale in April. Dedicated programs, I mean products and services for the mass merchants.

All in all, for 2011, the market in the first quarter 2011 still does not show significant signs of recovery. We still see some pressure on material cost, but in spite of many problems from Japan to North Africa, from Portugal to Greece, we continue to focus on achieving a further increase in sales at the end of 2011. We continue to see additional room for efficiency in order to allow further improvement in EBIT. For sure, we do confirm that the net financial position will almost double compared to the end of 2010. Thanks to everybody, now Mr. Natuzzi, Mimmo, Simon from Ipoint and ourselves will be delighted to answer your questions.

(Operator Instructions). We'll take our first question from Flavio Cereda from BOA-ML.

Hello, good morning, good afternoon. I was wondering if you could give us some information on your likely capital expenditure going forward, in particular the photovoltaic investment that you've done. Are we likely to see more along the same lines? You have now clearly a very healthy cash position. I'm assuming there will be a degree of cash absorption through working capital over time, but clearly you have more cash than you probably need on your balance sheet at this time. Can you give us a sense, if you can, over the next couple of years, the investment targets and the investment profile that we are likely to see? Thank you very much.

Hi Flavio, thank you for the question. We already did, you know, all the entire investment for photovoltaic in 2010, and we already paid the other percent of such amount. What we have in mind in the -- for sure, you know the benefit in our profit and loss are already arriving in our 2011 profit and loss, because we are already enjoying the reduction in energy costs.

And also we received some contribution from the Italian government, the Italian authority for the -- this environmental benefit that we give to the community. Then, looking forward, as you already know, we are completing the investment in the Chinese plants. The total amount that we will expand in China, as we announced it some months ago, is in the area of EUR10 million roughly. That is completely financed by the amount of cash we received from local authorities. This is the foreseeable investment we are doing this year, and then we will continue to invest some million euro on the rollout of SAP. Then, we'll see, we have cash, we have growing opportunities worldwide. We have markets to be explored and developed, and we'll see.

But if I could do a very quick follow-up, is it important -- maybe I guess Vittorio, it's a question for you and for Mr. Natuzzi there as well, is it important for you to maintain a certain minimum level of cash on your balance sheet? I know you want to be cash positive, but do you have a specific target whereby you don't really want to have less than X cash in the balance sheet or is that not really the way you think at the moment?

Yeah. If I may -- I'm Pasquale Natuzzi, good afternoon Flavio. Yes, certainly you -- the Company culture has been always to have some money and make sure to face difficult time, which are very common since several years. But despite that, we are working now on a business plan for 2012, '13, '14 and '15, and within the next three, four months -- for June we will have a business plan, and we will have a clear idea how and where to invest the money.

Certainly, we have already -- as Vittorio mentioned before, we are working on fabric upholstery where we expect to grow 20% of our business, but obviously to do that we need to invest money in product development, in sample for fabric in the store, advertising, communication in general. And then obviously with Natuzzi, we have -- certainly we have a plan to expand and cover certain market like Spain, like England, like France, where we need to create critical mass, you know, to open more store. So, we should invest the money certainly in expanding store, in expanding fabric upholstery, and even to develop sales for furniture. But again, within the next 60, 90 days, we should have a very clear idea when and how to invest our money.

Excellent, thank you very much.

You're welcome, sir.

(Operator Instructions). We'll take our next question from Dimitri Duffeleer from Quaeroq.

Hello, good afternoon or good morning. I've got a few questions. First, what is the current situation in Brazil? I know that Brazil has been rather loss making over the last number of years. What is its current situation and what should we expect for 2011?

Okay. So, we -- in February, we attended a furniture exhibition in Sao Paulo, and I personally, with Mimmo Cavallo and with some other local managers, we visited all the Latin America, from Mexico to Colombia, to Puerto Rico and Panama, and then we went also to Brazil visiting some state like Salvador de Bahia, Belo Horizonte, Sao Paulo, meeting customer in their store and even in the furniture exhibition.

The purpose of that trip was really to understand and to update our strategy on the Brazilian market. As you know, we have two factories that they used to manufacture for the American markets in the, let's say, until two three years ago, but since the exchange rate of the reais went up against with the US dollars, we've been shutting down one of the factory temporarily and reducing the production capacity of the other one in Salvador de Bahia, where the factory now, it's dedicated only for the Brazilian market.

The result of two weeks treat in Latin America, but specifically in Brazil was that Brazilian market offered tremendous opportunity for our company. We have a customer there waiting for us to open a Natuzzi store, but we want -- we want to give it priority. Why do we have a different brand? Our priority is to first develop additional business. We already hire eight reps, that they cover the eight states of Brazil. We have a manager for Italsofa. We opened already several stores and gallery, and we have a commitment to open more and more store and gallery with Italsofa. So, again the priority is to develop and increase the business with Edition and with Italsofa.

I met a lady, she owns a huge company called Magazine Luiza. They do $5 billion business, and they sell electronics and upholstery. I met the owner of this huge company, and we have made a program for them, four models program that we will test in five stores to beginning with in Sao Paulo, and then the next step will be 80 stores, but there have been totally 650 stores.

I met also the top management of Casa Bahia, it's another huge company, with another 600 stores in all of Brazil. We analyzed competition. The upholstery manufacturing in Brazil is very fragmented. The last 666 upholstery factory, 65% of those, they have less than 10 employee, and the larger one have only 110 employee. There is a tremendous opportunity for our Group considering the -- our product know-how and our turnkey program with the Natuzzi and the Italsofa brand that we have.

We hire recently just yesterday -- no, last Monday -- no, no, Monday, right -- Monday, the new COO that we hire is Pablo [Pla]. It took place Monday morning. I met him three times in Brazil in February, then he came to Santeramo, we did an induction and we did also -- we ask even a company, a consulting company to do an assessment. At the end, it seems that we've been very lucky to have a good, good manager which was recommended by one of our board member.

So, the COO yesterday together with [Nabila] is an Italian manager, and together with the local brand manager, Natuzzi and Italsofa, they are traveling Brazil, visiting state by state, rep by rep, customer by customer, to really analyze the potential business that we can develop in Brazil, and within middle of May and end of May, we will have a business plan, where we should then make sure that the promise that we are going to make on the marketplace, we will be in a position to manufacture. So, we are really -- Brazil for us has been well defined at top management level, but Brazil is strategic for our growth. But in the next 45, 60 days, we will be more accurate in giving you more detail about Brazil.

Okay, so we can expect some more numbers within two months or something like that?

Say again, say again Dimitri?

(Spoken in foreign language)

Oh yes, within two months, yes sir.

Okay. Any further news, I would say, on the development of the Softaly business?

Yes, in fact with -- regarding Brazil, the product proposition that we have made to Magazine Luiza, it's Softaly in Cologne was moderately -- considering that was the beginning, we are very much encouraged from the response that we are getting from the market. We are going to present here, even in North Carolina starting from Saturday, next Saturday. We have also Softaly program to present at market here, and we will do the same in Milano next week, which we have another exhibition affair. Softaly is going forward, and certainly it's an important project that will allow our Group to be relaunched.

Okay, thanks. And maybe just one last question, maybe more for Vittorio. On the G&A level, and on the productivity level, what is the kind of improvement that we still can expect going forward?

You mean G&A?

G&A and I would say production productivity.

Productivity, okay. First of all, productivity, productivity is, you know, is efficiency, amount, brands, market and production [apps]. In doing that, we have also to consider the job we are doing in terms of better definition of each of the brands, and inside each of the brand, the product offering of each of this brand. So, we are doing a lot of job in recent months in order to better define which is the goal of each brand, which is the collection of each of our brands, and which is the best way to serve the market, aiming to reduce the complexity of this company.

You know that we started two weeks ago with the cost of goods sold in [euro] 74%. We were able, in two years, to improve by 12% that figure. I think that all the job we are doing these days will give us the possibility to get some additional and important numbers in the cost of goods sold. As G&A are concerned, we have to speak about the organization on market, vis-a-vis headquarters.

We are doing some review of our organization worldwide trying to first better serve the market, higher the service level, but in meantime trying to optimize also the existing, let's say, companies and regions that we already have. But I think that the most important result will be at the end of this day by day work, very hard that we are doing, that results in terms of net sales will improve, and this will lower the percentage of, you know, the existing structure on sales. We need more volumes. We have room to reach more volumes on top line, and we'll get in as soon as possible.

Dimitri, to reinforce what Vittorio was saying is that, you know, in the last five, six years we became a global group, because you know, we opened the factory in China, in Romania, in Brazil. We developed three different brands, working on marketing mix in order to give to each brand a very clear identity. And many time, especially for Natuzzi, made in Italy, Natuzzi Italia, in order to develop the brand around the world, we became a retailer, and we have been developing store primarily in Europe, in each country -- European country. Now, from domestic and Italian domestic companies to became a global group with three brands, retailer, and the execution has created some difficulties, some difficulties, but in addition to the business climb that we have been facing in the last five, six, seven years since 2001.

But today, we have a very clear idea -- we've been assembling the entire complexity in a very simple way as far as I'm concerned. Today we have three brands, and we operate in three macro market. We have a brand, it's Natuzzi, Edition and Italsofa and they target a different customer. Then we operate in three macro market, Europe, Americas and the Asia Pacific. In Europe, we have factories in Italy and in Romania to supply each brand for the European market.

We are linking brand distribution channel factory, reviewing the product, the collection in order to reduce the complexity, because when we talk about the European market, for example about Edition, the collection -- the Edition collection that we sell in America is different from the one we sell in Europe. So, to manage a collection for each brand at worldwide basis, create huge complexity. We realize that, but since we are working, brand distribution channel, macro market and factory linked, we are working and simplifying complexity in order to gain more efficiency in all way around, we are working on product innovations, on process innovation.

The management is really full committed. There is a very clear strategy, and we are working now on the process and on the organization in order to make the process lean, and to make the Company efficient. That's, the project where we all are committed and working on it.

Okay, grazie mille.

Prego. Thank you.

(Operator Instructions). And at this time, it appears there are no further questions. So I'll turn everything back over to our speakers for any additional or closing remarks. Again, I will turn the conference back over to our speakers.

So, if there are no other further questions, so we thanks to everyone for listening to us. And if you have other further question, of course you can contact me or Vittorio anytime, and we will be at your disposal for -- try to give a more precise answer. Thank you very much for listening to us.

Thank you. That will end the conference. We thank you for your participation.